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HAVANA, May 29 (Reuters) – Russian state-owned oil company Zarubezhneft said this week it was giving up for now on a problem-plagued exploration well off Cuba’s north-central coast, which brings to an end the communist-led island’s only active project in its search for offshore oil fields.

The news was not all bad because the company said it would return to the same spot next year. But it was another blow to Cuba’s hopes for energy independence, which have acquired new urgency with the March death of Venezuelan President Hugo Chavez, the communist-led island’s top ally and benefactor.

The Russians’ plan to drill 6,500 meters (21,325 feet) below the sea floor and hopefully find oil appears to have been derailed by the same issue that others have encountered in Cuban waters – difficult geology – as well as problems with its rig, the Songa Mercur, which at one point lost its blowout preventer.

The Songa Mercur Drilling Platform

“Taking into consideration geological complications, Zarubezhneft and (Cuban state oil company) Cubapetroleo have jointly decided to make changes in the initial drilling program by dividing it into two stages,” the company told Reuters this week.

“The second stage of exploration work on Block L is due to be launched in 2014,” it said, declining to comment further. The well, begun five months ago, was in shallow water about 200 miles (320 km) east of Havana, near the popular tourist destination Cayo Santa Maria.

The premature end of the Zarubezhneft well was not totally unexpected because Songa Offshore, owner of the Songa Mercur, earlier said the rig would leave by June 1 for a project in Southeast Asia. It had originally been scheduled to stay in Cuba until July 1.

There was a Russian press report that the rig would come back for another attempt by Zarubezhneft, but Songa Offshore Chairman Jens Wilhelmsen told Reuters the report was “completely without foundation.”

“We have not any agreement that Mercur will return and we have not received any inquiries from Zarubezhneft that they want it back,” he said. “So I can just deny that Mercur will return.”

BACK TO SQUARE ONE

All of which means that Cuba is back to square one in its quest to tap into fields off its northern coast that it says may hold 20 billion barrels of oil. The U.S. Geological Survey has estimated a more modest 4.6 billion barrels.

In the last year, Spain’s Repsol SA, Malaysia’s Petronas and Venezuela’s PDVSA sank wells in waters more than a mile deep off Cuba’s northern and western coasts. They all came up dry, and encountered a thick layer of dense rock difficult to drill through.

The Caribbean island’s hopes now lie with projects under consideration that may or may not come to fruition and are likely at least a year or more away if they do. Should oil be found, it would take another three to five years to put it into production, experts say.

Time is of the essence for Cuba because, under a generous deal made with Chavez, it gets 110,000 barrels per day, or two-thirds of its oil, from Venezuela in exchange for the services of more than 40,000 Cubans, most of them doctors and other medical personnel.

Chavez’s successor, President Nicolas Maduro, vowed during a recent visit to Havana to keep the oil flowing, but he faces mounting economic problems and political pressure from opponents to stop shipping oil to Cuba.

Repsol, which also drilled an unsuccessful well in deep water near Havana in 2004, pulled out of Cuba, but some of the other oil partners are still around.

Petronas is continuing to conduct seismic studies in the four blocks it leases with Russian partner Gazprom and is considering another well, as is Venezuela’s PDVSA, which has four blocks at Cuba’s western tip, industry and diplomatic sources said.

A unit of India’s Oil and Natural Gas Corp, which had a share of the Repsol wells, has two offshore blocks of its own and has been looking for a partner to drill a well.

GARDENS OF THE QUEEN

In a development that is potentially both interesting and controversial, Norway’s Statoil ASA, which also partnered with Repsol, appears to be looking at possibilities on Cuba’s mostly unexplored Caribbean side.

A Cubapetroleo map on display at a recent geosciences conference in Havana indicated that as of last November, Cuba was in negotiations with the Norwegian oil giant to lease three large blocks along the central and southeastern coast, between the archipelago of the Gardens of the Queen and the coast in the Gulf of Ana Maria and the Gulf of Guacanayabo.

Statoil does not comment on pending projects, but industry sources said it may just be sniffing around as it does all over the world looking for oil prospects and that its level of interest remains to be seen. The company has not mentioned Cuba in its drilling plans for the next two years.

It is likely also mindful of the sensitivity and potential dangers of drilling near the Garden of the Queens, which is regarded as one of the world’s most pristine coral reefs and whose preservation as such has become a cause for international environmental groups.

The same Cubapetroleo map showed that a Brazilian firm, Synergy Corp, was in negotiations for a near-shore block on Cuba’s north coast that state-owned Petrobras abandoned two years ago, citing poor prospects.

Attempts to reach Synergy for comment were unsuccessful.

A number of factors are working against Cuba’s oil hopes, among them the political and logistical difficulties imposed by the long-standing U.S. trade embargo against the island.

The embargo makes it difficult to find rigs that do not violate its limitations on the use of U.S. technology in Cuba and, according to experts, adds an estimated 20 percent to costs because everything in the project has to be shipped in from distant, non-U.S. sources.

There is also Cuba’s history of failed wells, which makes it hard to compete for the oil industry’s interest in a world where there are many other areas with proven oil reserves.

“It is very difficult today with other opportunities out there for a major oil company to justify going to Cuba and spending what will certainly be over $100 million in areas where it is yet to be proven they have recoverable reserves,” said Jorge Pinon, an expert on Cuban oil at the Center for Energy and Environmental Policy at the University of Texas in Austin.

A house near Boyeros, the avenue to the city’s airport, is being offered for the equivalent of $120,000, with all the amenities.

“The house is beautiful; it has four bedrooms, a pool with a bar and a fountain with a lion’s head on top. Look,” says Belen, pointing to photos on the sign, “water comes out of the lion’s mouth.”

Pausing for dramatic effect, Belen, one of the many touts, or “runners” working at the market, delivers what he hopes will be the coup de grace.

“This place needs no work. It is of capitalist construction,” he says, using a now frequently invoked commendation meaning it was built before Cuba’s 1959 revolution and is therefore of superior quality.

Given that “capitalist” has been a dirty word in communist-run Cuba for the last half century, the description perhaps grates on the nerves of Cuban leaders.

But its widespread usage is a sign of the times on the Caribbean island, where President Raul Castro has loosened things up as he tries to modernize the country’s economy in the name of preserving the socialist system put in place by his older brother Fidel Castro.

HOME SALES REPLACE SWAPPING

In November 2011, the government decreed that Cubans could buy and sell homes for the first time since the early days of the revolution, paving the way for a real estate market that has become an exercise in bare-knuckled capitalism. Previously, Cubans could only do swaps – or “permutas,” in Spanish – with their houses.

“For Sale” signs are now a common sight on homes and apartments across the country, more than 100,000 properties are posted for sale on Internet sites and even state television has gotten in on the act, devoting part of a daily show to sales announcements sent in by viewers.

The government last released figures on the market in September 2012 when it said 45,000 dwellings had changed hands in the first eight months of the year, partly through sales, but mostly through “donations.”

Cubans, accustomed to finding ways around heavy-handed government rules and regulations, say many sales are disguised as donations to avoid paying sales fees and taxes.

The new market, despite its apparent vibrancy, is still sorting itself out and still faces hurdles. The main one is that many people are trying to sell and few Cubans, who receive various social benefits but earn on average the equivalent of $19 a month, have the money to buy.

“With the new law, you can sell your house, but there’s no money, nobody to buy. There’s more being offered than there is demand,” said retired economist and math professor Raul Cruz, who has had his apartment in the Vedado district on the market for five months.

Havana was once considered an architectural jewel with an eclectic mix of colonial homes and modern Art Deco construction, but much of the city outside the touristy Old Havana district is in a dilapidated state after decades of neglect and corrosion from humidity and salty sea air.

A study by a Miami-based group found that asking prices range from the equivalent of $5,000 to $1 million, with a median price range between $25,000 and $40,000. Cuba has two currencies, the peso and the convertible peso, the latter of which is used in most housing transactions and is pegged one-to-one with the U.S. dollar.

FOREIGN BUYERS?

What has developed is a two-tier market, the runners at Paseo del Prado say, with Cubans mostly buying small places for between $5,000 and $10,000 and foreigners with Cuban connections buying the more expensive properties.

Sixty-year-old graphic designer Pepin, who did not want to give his full name, has been trying for six months to sell his nearly century-old Vedado home, two stories and painted blue, for $130,000.

So far almost everyone taking a look has been a foreigner or a Cuban with family abroad providing the money, he said, and all have tried to bargain for a lower price.

“One Chinese man, for example, offered me 80,000, but I’m not desperate or anything. If they give me what I want, fine. If not, I’ll stay here,” he said, relaxing in a chair on his plant-enshrouded front porch.

By law, the market is open only to Cubans on the island or those living temporarily abroad. But foreigners, including Cubans living in the United States or other countries, are buying properties in the names of Cuban spouses, family members or friends.

Companies with offices abroad have sprung up to cater to foreign buyers, posting photographs and descriptions of properties across the country on the Internet. Attempts to speak with one of them, Point2Cuba, went unanswered.

The reasons foreigners buy are varied, said Emilio Morales, president of the Havana Consulting Group in Miami.

“I have heard of people who are buying homes and turning them into businesses,” he said. “Some are looking for an investment, others doing it for their family (in Cuba).”

The Cuban government has laid the groundwork for allowing foreigners to buy property on the island, but only in resort developments for which approval has been pending for years.

It could inject billions of dollars into the cash-strapped economy by opening the real estate market to all in a new foreign investment law, said Morales.

BARGAIN HUNTING

Information on pricing in the real estate market is sketchy, but the general sense among Cubans is that asking prices began high and have come down somewhat.

Most blame the drop on the supply and demand problems, while others point the finger at another Raul Castro reform – a newly liberalized migration law, which took effect on January 14 and makes it easier for Cubans to go abroad.

“Prices have dropped now because there’s a greater incentive after January 14 to sell and abandon the country. Which is to say that people hurry up and want to sell quickly,” said Roberto Perez, who is trying to sell his two-story home near the sea in Havana ‘s Playa district for $200,000.

The prices depend on the necessity of the seller. “Someone who has a visa (to go to another country) and has a house worth 60,000 may sell it for 30,000,” said Belen, the Paseo del Prado runner.

Selling is being driven by Cubans wanting to cash in on the sole major asset most of them have. One of the quirks of Cuban communism is that while most things are property of the state, the vast majority of the country’s 3.2 million homes are owned by the people living in them.

“This is one of the things that gave longevity to the Revolution. They have something that most people in Latin America don’t have and wish for,” said Miami lawyer Antonio Zamora, a Cuban American who visits the island frequently.

While some sellers want to sell so they can leave, many simply want the money so they can live better in Cuba. Most said they would use part of the money to buy a smaller house, then live off the rest or use it to open a business.

Need and the low economic standards on the island have created some incredible bargains for people accustomed to paying high housing prices in other countries.

One woman, who did not want to give her name or the location of her residence, said she had recently sold the six-bedroom penthouse with a sweeping sea view she shared with several family members for the equivalent of $130,000. The buyer was a European with a Cuban spouse.

“I know it’s going to be worth a lot more in 10 years but everybody in the family wanted the money now. When we were moving out, a man came running up and told me he would give me 50,000 more than whatever the sale price was, but we had already signed the contract,” she said with a sigh.

Zamora, the Miami lawyer, predicted that Cuba would one day be a big market for Cuban Americas retirees.

“This is going to be huge,” he said, noting that Cuba has low crime and health costs, as well as good airport connections to the United States and a well developed money transfer industry for remittances.

“$750 in social security in the U.S. is nothing here in Miami but it can go a long way in Cuba,” he said.

(Additional reporting by Nelson Acosta and Rosa Tania Valdes in Havana and David Adams in Miami; Editing by David Adams and Claudia Parsons)

HAVANA Feb 3 (Reuters) – Cuba is opening the door to private management of some state-run cafes and food service outlets in an apparent test of further reforms aimed at keeping the island one of the world’s last communist countries.

The government said food prices rose nearly 20 percent in 2011 in a warning sign that economic change will not be painless.

Spain’s Repsol YPF brought the massive Scarabeo 9 drilling rig into Cuban waters and began drilling what Cuba hopes will be the first of many wells in its untapped offshore oilfields.

ECONOMIC REFORMS

In eastern Holguin province, officials said 211 state-owned cafeterias would be leased to employeesin a semi-privatization similar to what has been done nationally with barber shops and beauty salons the past year and recently expanded to other service businesses such as watch repair and carpentry shops. The Holguin program has not been mentioned in national media, but is likely a trial run before it becomes generalized, as was done with the other services.

The government, which wants to slash a million jobs from its payroll and encourage more private initiative, has said it will turn many small businesses, nationalized since the 1960s, over to employee cooperatives. It is encouraging self-employment, with more than 362,000 people now working for themselves. Economy Minister Adel Yzquierdo Rodriguez told the National Assembly in late December that 170,000 state jobs would be cut in 2012 and as many as 240,000 new non-state jobs added. The government’s goal is to have up to 40 percent of the island workforce of 5.2 million in non-state jobs by 2015.

President Raul Castro has made reform of Cuba’s lagging agricultural sector a top priority and the Cuban state, which owns 70 percent of the country’s land, has leased 3.5 million acres (1.4 million hectares) to 150,000 private farmers since he succeeded older brother Fidel Castro as president in February 2008. In some areas, the state has increased the land farmers can lease to 165 acres (67 hectares), extended their leases to 25 years, allowed them to build homes on the land and will let them pass the leases on to family members. Yet food output was up just 2 percent in 2011 and still below 2005 levels.

That, reduced food imports by the cash-strapped government and reforms allowing farmers to sell more of their production for market prices combined to make food prices shoot up in 2011. The National Statistics Office reported that meat prices rose 8.7 percent while produce prices increased 24.1 percent, for an average of 19.8 percent on the year..

At the same time, the average monthly salary inched up only a few percentage points to the equivalent of $19 a month, the government said. The statistics stated what Cubans already knew — their buying power has shrunk under Castro’s reforms.

President Castro told the National Assembly that Cuba still expected to spend $1.7 billion on food imports in 2012.

He also emphasized at a Communist Party conference the importance of an ongoing crackdown on corruption, which already has shuttered three foreign firms and sent executives of some of Cuba’s biggest state-run firms to prison. He said the party would implement term limits for the country’s leaders, but he gave no details.

What to watch: The pace of reforms and their consequences; The development of small businesses; Agricultural production and food prices.

FINANCIAL HEALTH

Castro said the economy grew 2.7 percent in 2011 and was expected to rise 3.4 percent in 2012. Cuba said it drew a record 2.7 million tourists in 2011, bringing in revenues of about $2.3 billion.

Travel industry experts say tourism has boomed this winter as the Arab Spring scared Europeans away from northern Africa, relaxed U.S. regulations made it easier for Americans to visit the island and Castro’s reforms drew visitors curious to see the effects of changes. They said Cuba needs more hotels to accommodate its growing tourism industry, which is a top hard currency earner for the country.

Cuba is heavily indebted and still recovering from a liquidity crisis that led to a default on payments and freezing of foreign business bank accounts in 2009. Castro told the National Assembly that accounts for foreign suppliers to Cuba had been unfrozen and steps taken to prevent the problem from happening again.

Hopes that reforms would bring more foreign investment have been slow to materialize, but Brazilian company Odebrecht said it would sign a contract to help Cuba improve its troubled sugar industry. One executive said the deal would include ethanol production. Long-awaited golf course developments, aimed at attracting wealthier tourists, remain on hold.

What to watch: Resolution of outstanding short-term debt; Signs of increased interest in foreign investment; Growth of tourism and Cuba’s ability to handle it

OIL PLANS

The Chinese-built Scarabeo 9 arrived in Cuban waters and at January’s end began drilling the first of three exploration wells in Cuba’s part of the Gulf of Mexico. Spain’s Repsol YPF and its partners plan to drill two of the wells and Malaysia’s Petronas and its partner, Russia’s Gazprom Neft, will drill the other, all this year and with the same rig.

The project has drawn opposition in the U.S. Congress, but, to allay safety concerns, Repsol allowed U.S. experts to inspect the Scarabeo 9 in Trinidad and Tobago. They said it met all international engineering and safety standards.U.S. companies are forbidden from operating in Cuba by the U.S. trade embargo.

Cuba depends on imports from its oil-rich ally Venezuela, but says it may have 20 billion barrels of oil offshore. The U.S. Geological Survey has estimated 5 billion barrels.

What to watch: Results of Repsol’s exploratory well; U.S. pressure to stop the drilling.

FOREIGN RELATIONS

A planned Papal visit in Marchimproved ties with Brazil, whose President Dilma Rousseff paid an official visit in January,are bright spots even as Cuba faces a more hostile Spanish government elected in November.

A major concern for Cuba is the health of Venezuelan President Hugo Chavez, a loyal ally whose government provides 114,000 barrels of oil a day and investment to Cuba. He underwent chemotherapy in Cuba and has declared himself cancer free, but experts say it is too soon to tell. If he were unable to continue in office, it would be a big blow to Cuba.

U.S.-Cuba relations, which thawed briefly under President Barack Obama, have been frozen by the imprisonment of U.S. aid contractor Alan Gross.He is serving a 15-year sentence for providing Internet gear to Cuban Jews under a U.S. program promoting Cuban political change. A document reported to be the court’s sentence said Gross knew the political aims of his work and tried to hide it from Cuban authorities despite his claims to the contrary.

Spanish oil company Repsol YPF has begun drilling the first well in Cuba’s long-awaited exploration of offshore oilfields that the communist country says hold both billions of barrels of oil and the key to greater prosperity, industry sources told Reuters on Thursday.

The massive Scarabeo 9 drilling rig, which arrived in Cuban waters two weeks ago, began drilling into the sea floor about 30 miles northwest of Havana on Tuesday night, the sources said.

A Repsol spokesman said the company could not comment on “operational details.”

The newly built, high-tech rig is operating in 5,600 feet of water, or what the oil industry calls “ultra-deep water,” in the Straits of Florida, which separate Cuba from its longtime ideological foe, the United States.

Sources close to the project said such wells generally take about 60 days to complete.

Repsol, which is operating the rig in a consortium with Norway’s Statoil and ONGC Videsh, a unit of India’s Oil and Natural Gas Corp, has said it will take several months to determine the results of the exploration.

The well is the first of at least three that will be drilled in Cuban waters with the Scarabeo 9, which was built in China and is owned by Saipem, a unit of Italian oil company Eni.

Sources have said that Repsol will drill the first well and then the rig will go to Malaysia’s Petronas in partnership with Russia’s Gazprom Neft and then back to Repsol for the third well.

It is not clear what happens after that, although some sources have said Repsol, which is leasing the Scarabeo 9 from Saipem at a rate said to be more than $500,000 a day, will move the rig to Brazil for exploration there.

Cuba has said it may have 20 billion barrels of oil in its northern waters, which are its part of the Gulf of Mexico. The U.S. Geological Survey has estimated it may have 5 billion barrels of oil, but its study does not include the entire Cuban gulf zone.

EASE FINANCIAL WOES

Cuba, which is in the midst of reforming its Soviet-style economy, is hoping oil will ease it chronic financial woes and bring energy independence from its socialist ally Venezuela. It receives about 115,000 barrels daily from the oil-rich South American country.

But if oil is found, experts say it could take five years or so to begin production because more drilling will be needed and production infrastructure put in place.

Repsol drilled the only previous offshore well in Cuba in 2004 and said it found oil but that it was not “commercial.”

It has been difficult to find a rig for more drilling because of the 50-year-long U.S. trade embargo against Cuba, which limits the amount of U.S. technology that can be used.

The Scarabeo 9, which is of Norwegian design, has only one piece of American equipment – the blowout preventer, a key part that failed in the 2010 blowout of a BP well in the U.S. Gulf of Mexico.

The BP well, which was in more than 5,000 feet of water and spilled 5 million barrels of oil, stained hundreds of miles of U.S. coastline.

In Florida, 90 miles north of Cuba, the Cuba offshore project has raised fears that a similar accident could damage the state’s beaches and coral reefs.

Drillers in Cuban waters could get within 45 miles of Florida, while in the U.S. gulf no exploration is permitted within 125 miles of the state.

At Repsol’s invitation, a team of U.S. experts inspected the rig in December in Trinidad and Tobago and said it complied with all existing engineering and safety standards.

But the United States, which has no official diplomatic relations with Cuba, has only made safety preparations from afar and has not been otherwise involved in the project.

Countries such as Norway and Brazil have helped lead an international effort to get Cuba ready for oil exploration and the possibility of an oil spill.

The project has gone forward despite opposition in the United States from Cuban exile leaders, who have proposed legislation in the U.S. Congress to try to stop Repsol.

They fear that oil will enrich and assure the survival of the Communist government they have long opposed.

“We need to figure out what we can do to inflict maximum pain, maximum punishment to bleed Repsol of whatever resources they have if there’s a potential for a spill that would affect the U.S. coast,” U.S. Rep. David Rivera from Florida told a congressional subcommittee in Miami on Monday.